China’s Drug Reimbursement Transition to Support Innovation

Zijing Yang, Student Fellow, Stanford LLM 2025

In the previous blog post, I discussed China’s national drug centralized procurement policy implemented since 2018 for off-patent drugs. In recent years, China’s National Healthcare Security Administration (the “NHSA”) has also introduced a mechanism targeting innovative drugs with no generic alternatives, known as the national medical insurance negotiation mechanism (the “Medical Insurance Negotiation”). Similar in logic to the drug centralized procurement policy, the Medical Insurance Negotiation also leverages the expectation of access to a large patient population to encourage pharmaceutical companies to lower prices for their drug products, thereby reducing the financial burden on patients seeking cutting-edge treatments.

However, there has been growing concern within the industry that the downward pricing pressure in connection with the Medical Insurance Negotiation may discourage pharmaceutical companies from investing heavily in research and development during the early stages, which could potentially hinder the long-term development of China’s innovative pharmaceutical sector.

In response to these concerns, the NHSA recently announced that starting in 2025, it will implement a new reform to explore diversified payment mechanisms for innovative drugs. This includes establishing a new reimbursement category in China’s national basic medical insurance drug catalogue (the “Drug Catalogue”) as Category C. These drugs are not expected to be covered by the national basic medical insurance program (the “National Medical Insurance”), but the government would encourage commercial health insurance providers to include those Category C innovative drugs in their coverage.

At present, commercial health insurance plays only a limited role within China’s healthcare system and relies primarily on individual marketing channels. In 2023, total expenditures under the National Medical Insurance were RMB 2.82 trillion[1] (approximately USD 391.8 billion), maintaining its dominant position in the country’s healthcare financing system. In contrast, according to data from the Insurance Association of China, commercial health insurance settled claims totaling RMB 384.8 billion (approximately USD 53.4 billion) in the same year, equivalent to only 13.6% of the total spending under the National Medical Insurance.

Current Drug Reimbursement Framework in China

China’s existing healthcare system is largely supported by its National Medical Insurance, which serves as the foundation of the country’s medical coverage. By the end of 2024, more than 1.32 billion people were enrolled in the National Medical Insurance, with the coverage rate holding steady at around 95% of the country’s population.[2] Drug coverage under the National Medical Insurance is managed through the nationally unified Drug Catalogue, which is based on generic drug names and is updated once a year.

The current Drug Catalogue is divided into two categories: Category A and Category B. Drugs classified as Category A drugs are those considered essential for clinical treatment and are generally lower in cost compared to similar alternatives, and their expenses are fully reimbursed by the National Medical Insurance. Category B drugs are generally more expensive alternatives within the same therapeutic class, for which patients are required to pay a portion out-of-pocket, varying by province but typically around 20%, while the remaining is covered by the National Medical Insurance. Drugs prescribed by doctors that are not included in the Drug Catalogue are paid for entirely by patients.

The Medical Insurance Negotiation is a process that determines whether a new drug with no existing generic alternatives can be included in the Drug Catalogue and at what price. During the annual update of the Drug Catalogue, the NHSA reviews applications submitted by pharmaceutical companies for their innovative drug products. Following clinical and economic evaluation, the NHSA negotiates directly with these pharmaceutical companies on the reimbursement standard under the National Medical Insurance, which ultimately determines whether an innovative drug can be included in the Drug Catalogue.

Innovative drugs that are added to the Drug Catalogue through the Medical Insurance Negotiation are categorized as Category B drugs. By updating the Drug Catalogue each year, the NHSA has been able to include a growing number of newly approved innovative therapies in the National Medical Insurance reimbursement system, improving patient access to these treatments by making them more affordable. For pharmaceutical companies, participating in the Medical Insurance Negotiation and entering the Drug Catalogue can translate into broader market access and the potential for rapid growth in sales volume.

Implications on China’s Innovative Drug Development

In fact, a series of measures introduced by the NHSA recently are designed with the goal of promoting the development of innovative drugs in China, while maintaining the sustainability of the National Medical Insurance fund and ensuring patient access to affordable treatments.

One major approach has been to reduce spending on off-patent drugs through national drug centralized procurement, thereby reallocating the funds from National Medical Insurance to cover more high-cost innovative therapies. According to NHSA’s data, around RMB 440 billion (approximately USD 61 billion)[3] has been saved through the implementation of China’s national drug centralized procurement since 2018, of which over RMB 360 billion (approximately USD 50 billion) has been allocated to the reimbursement of drugs newly added to the Drug Catalogue through the Medical Insurance Negotiation.[4]

In addition, the NHSA has implemented the policy of reviewing and updating the Drug Catalogue on an annual basis since 2018, alongside introducing the Medical Insurance Negotiation mechanism for innovative drugs. These reforms have significantly shortened the time it takes for new drugs to be included in the Drug Catalogue after regulatory approval, reducing it from as long as eight years in the past to an average of just over one year today. Currently, around 80% of newly approved drugs are added to the Drug Catalogue within two years of their market entry.[5]

China has indeed made significant progress in the development of innovative drugs in recent years. As disclosed by NHSA, China accounted for just 3% of the global drug development pipeline in 2013, while by 2023, that figure had nearly increased tenfold, reaching 28%.[6]

While recent reforms in the National Medical Insurance system have begun to show positive results in supporting the development of innovative drugs, with China’s population starting to age rapidly, the national healthcare system is under growing pressure to meet rising demand with limited funding capacity. According to NHSA’s data, in 2024, the total income of the National Medical Insurance fund reached RMB 3.48 trillion (approximately USD 483.33 billion), representing a 4.4% year-on-year increase, while its total expenditures rose to RMB 2.97 trillion (approximately USD 412.5 billion), growing by 5.5% from the previous year.[7] Since the National Medical Insurance fund is the largest purchaser in China’s pharmaceutical market, its growing financial pressure has increasingly been seen as a potential constraint on the long-term development of China’s domestic innovative pharmaceutical industry.

Expanding the Role of Commercial Health Insurance

The NHSA’s plan to establish a Category C of the Drug Catalogue and to encourage commercial health insurance to cover drugs under Category C is primarily intended to create an additional payment pathway outside the National Medical Insurance for innovative drugs.

The Category C catalogue is designed as a separate reimbursement category, in addition to the existing Category A and B catalogues. It is intended to include highly innovative drugs with significant clinical value and substantial patient benefit, but which are not yet covered by the National Medical Insurance due to its focus on essential healthcare needs.

The NHSA is expected to release the first edition of the Category C catalogue later this year, with plans to update it annually alongside the existing Category A and B catalogues. The NHSA announced that it will actively involve insurance companies in the design and revision process for the Category C catalogue and will also coordinate negotiations between insurance providers and pharmaceutical companies to determine appropriate reimbursement prices for the new drugs to be covered.

In China, commercial health insurance functions as a supplement to the basic National Medical Insurance system and is primarily operated by private for-profit insurers, including some foreign companies like AIA. Plans vary widely: standard coverage typically costs several hundred to a few thousand RMB per year (roughly a few dozen to a few hundred U.S. dollars), with coverage limits ranging from around one hundred thousand RMB to several million RMB (comparable to tens to hundreds of thousands of U.S. dollars in coverage), often reimbursing expenses not covered by the National Medical Insurance. High-end plans can cost up to tens of thousands of RMB annually (roughly equivalent to several thousand U.S. dollars or more), offering broader benefits and international medical access. Commercial insurance is more commonly used in major urban areas, while smaller and less-developed regions continue to rely primarily on the National Medical Insurance system. Additionally, many local governments have launched “Huiminbao”—government-guided, low-cost plans offered by private insurers—with annual premiums around RMB100 (about USD15). While Huiminbao has gained wide popularity, its coverage remains limited. Overall, China’s commercial health insurance market is highly segmented and expected to play a growing role, particularly in areas such as coverage for innovative drugs.

Therefore, expanding commercial health insurance will have the potential to unlock significant payment capacity to support the continued growth of innovative drugs in China. Going forward, pharmaceutical companies developing innovative drugs will have two strategic options. One is to pursue inclusion in the Category B catalogue through the existing Medical Insurance Negotiation, by accepting a lower price in exchange for access to over 1.3 billion people covered by the National Medical Insurance. The other is to seek inclusion in the Category C catalogue, allowing them to retain more of their original pricing strategy while targeting patients covered by commercial insurance, a group that is expected to expand further with future policy support from the NHSA.

Although the NHSA has no regulatory authority over commercial insurers to mandate the reimbursement of innovative drugs included in the Category C catalogue, the agency has stated that it will adopt a range of incentive measures to actively encourage and support commercial insurers in using the Category C catalogue as a reference. According to industry experts, the NHSA may offer policy support through various measures, such as sharing data on drug usage, guiding individuals to purchase commercial insurance through its existing system, or promoting joint settlement mechanisms between commercial insurance and National Medical Insurance in medical institutions.

Industry experts note that commercial insurers are likely to be willing to include these drugs in their coverage. Currently, the main challenge faced by commercial insurers is the difficulty in accessing hospital drug usage data, which prevents them from accurately tracking drug sales and forces them to rely on third-party estimates. This limitation affects the insurers’ ability to define reimbursement scopes, indications, and coverage rates for medications. Access to authoritative data from the NHSA would enable commercial insurers to design more precise reimbursement schemes. Furthermore, as the NHSA may guide individuals to purchase commercial insurance through its system, this could open new sales channels and foster a win-win outcome for all parties involved.

[1] National Healthcare Security Administration (PRC), Statistical Bulletin on the Development of National Healthcare Security in 2023 (July 25, 2024), https://www.nhsa.gov.cn/art/2024/7/25/art_7_13340.html.

[2] National Healthcare Security Administration (PRC), Statistical Express Report on the Development of National Healthcare Security in 2024(March 21, 2025), https://www.nhsa.gov.cn/art/2025/3/21/art_7_16054.html.

[3] All USD equivalents in this blog are approximate and based on an exchange rate of RMB 7.2 to USD 1.

[4] National Healthcare Security Administration (PRC), National Healthcare Security Administration Holds Press Conference on “Safeguarding People’s Health and Empowering Economic Development” (January 17, 2025), https://www.nhsa.gov.cn/art/2025/1/17/art_14_15491.html.

[5] National Healthcare Security Administration (PRC), 2024 On-Site Negotiations for the National Medical Insurance Drug Catalogue Adjustment Successfully Concluded (November 2, 2024), https://www.nhsa.gov.cn/art/2024/11/2/art_14_14511.html.

[6] National Healthcare Security Administration (PRC), Transcript of the 2024 Press Conference on the Adjustment of the National Drug Catelogue for Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance (November 28, 2024), https://www.nhsa.gov.cn/art/2024/11/28/art_14_14889.html.

[7] See supra note 2.